U.S. e-commerce logistics costs expected to keep heading in one direction

The ongoing impact of e-commerce related to logistics costs in the United States continues to head up rapidly, due to a variety of factors, according to a new report issued this week by supply chain consultancy Armstrong & Associates.

One of the key themes of the the report, entitled “E-Commerce Logistics in the United States,” states that e-commerce logistics costs in the U.S. now accounts for 6.9% of total U.S. logistics costs, which is ahead of 2016’s 5.2% tally. Making these figures even more significant is that based on data from the U.S. Census Bureau, when it first tracked e-commerce sales in 1999, e-commerce represented a mere 0.6% of total retail sales.

What’s more, Armstrong found that over the last five years, e-commerce logistics costs have a compound annual growth rate of around 15%, with the expectation that it will remain at the level or head further up. Taking that a step further Armstrong said it estimates that U.S. e-commerce logistics costs are expected to increase at an 18.8% rate per year through 2020.

In the 113-page report, Armstrong examines the various logistics-related facets of U.S.-based e-commerce, including domestic and international transportation, warehousing and fulfillment, last-mile, and reverse logistics, from the manufacturer to the customer.

In an interview, Armstrong & Associates President Evan Armstrong said that a large growth driver of U.S.-based e-commerce and its subsequent impact on logistics is due to Amazon’s market-leading capabilities and services.

“Amazon continues to grow like crazy,” he said. “In the old days, people would go to the store and buy what they needed and take it home. Now, people are going online and buying stuff….bringing an increasing need for more forward stocking in e-commerce fulfillment centers. Before things would go from a port to a distribution center to a store, and customers would make purchases at the store. And now it goes from port to distribution center to fulfillment center and then to the customer through some form of last mile delivery. That whole change in e-commerce logistics…from execution to getting orders fulfilled is really changing the way logistics happens, especially in retail. That is what is driving logistics costs up, and, in turn, it is also creating some opportunities for 3PLs.”

And that is for good reason, considering that e-commerce is the fastest-growing segment within the 3PL market.

That is exemplified in the report’s, data, too, with Armstrong pointing out that in 2017 e-commerce accounted for $12.8 billion of the $185.7 billion U.S. 3PL market, with the expectation that figure will rise to $20.9 billion by 2020.

“[2020] is coming up fast, and things are growing like crazy,” he said. “Of course, the hard part is how to make money at it, because the Amazon effect has pretty much driven the expectation to consumers that they are not going to have to pay for shipping and will always get two-day service. As a 3PL, the question is ‘how can you do this and how can you do this for customers and provide them fulfillment services and still make money as a 3PL?’ That is really where you need a good strategy and develop a good e-commerce strategy as part of this.”

This is what makes e-commerce logistics different from traditional value-added warehousing and distribution (VAWD), he explained, in that in traditional VAWD a lot of what happened can result in outbound less-than-truckload or full truckload movements to meet demand in some case, as well as an increase in small package activity, too.

This can also involve courier services, depending on what the specific distribution patterns are, which, in most cases, involves UPS and FedEx shipments.

“In terms of a strategy, there has to be a real emphasis on mechanization, in terms of when to mechanize the operation and looking at the requisite abilities needed to handle the business, thew anticipated service performance levels based upon the voice of the customer, and what the market is driving,” he said. “From there, it requires more tactical things like how to pay for UPS and FedEx and being able to add that costs into the cost of the product versus trying to charge extra for it, meaning the market resistance of paying extra for shipping. It requires some modeling and you need to have the overall business strategy to handle e-commerce fulfillment, as well as warehouse modeling, and you need to know and outline with customers what the service expectations are for an on-time service and from a customer requirement level, too. They all need to go into the plan in the form of an e-commerce strategy at the corporate level and then driven down to the individual operations and then how you are modeling the individual operations from a pricing standpoint and a customer support standpoint.”

While e-commerce logistics creates a whole host of options from a service perspective, it also comes with more than a few challenges, too. And these challenges can be wide-ranging, depending on the type of product moving through the supply chain.

Things can become challenging when going from operations that can range from batch picking to case picking to picking large items like refrigerators out of rack locations, for example, Armstrong said.

“On the e-commerce fulfillment side, the different commodities handled, coupled with the number of SKUs being high and diversity in the products handled can cause a lot of challenges on the warehouse planning and operations sides,” he said. “Those are challenges. You also have to weigh costs of expensive things like sortation systems against using a warehouse worker do it. You have to look at those sorts of things when planning out e-commerce logistics operations. It all needs to be approached with the perspective of how to make money in this business as a 3PL.”

On top of that, Amazon is always lurking, with Armstrong pointing out it is encroaching into the 3PL space, especially on the VAWD side, and if they do not get a customer to do Fulfillment by Amazon, they now have on-site personnel within a customer’s operations to embed people within operations to support a 3PL’s or or shipper’s fulfillment operations as a type of outsourced solutions companies can use if they do not want to completely do Fulfillment by Amazon (FBA).

“Amazon is such a force to be reckoned with, especially when it can command significant incentives from small package carriers,” he said. “It makes sense if you are a small-to-mid-sized shipper to work with Amazon just to leverage their small parcel rates as you cannot get those same rates on your own. A lot of that has to do with volume and route density, which are the ways to make money in the small package game.”

About the Author

Jeff Berman, Group News Editor

Jeff Berman is Group News Editor for Logistics Management, Modern Materials Handling, and Supply Chain Management Review. Jeff works and lives in Cape Elizabeth, Maine, where he covers all aspects of the supply chain, logistics, freight transportation, and materials handling sectors on a daily basis. Contact Jeff Berman